How market dynamics and business models determine which solar soft costs to reduce first
My recent poster presentation from Solar Power International 2014, “Using Seven Forms of Waste and Critical Path Method to Lower Residential Solar Soft Costs,” lays out a methodology that residential solar installers can use to help them most effectively target soft cost reductions. This methodology pulls best practices from automobile manufacturing and other industries as well as professional project management approaches that companies have successfully used to control costs and create customer value.
Why Does This Matter?
According to National Renewable Energy Laboratory (NREL) research published in October 2013, Benchmarking Non-Hardware Balance-of-System (Soft) Costs for U.S. Photovoltaic Systems, Using a Bottom-Up Approach and Installer Survey – Second Edition,nearly 64% of the cost of residential solar is comprised of “soft costs,” defined as a project’s nonhardware costs. Residential solar market leaders are aggressively attacking soft costs to remain competitive and increase market share. However, many of the techniques used by these companies–such as mergers/acquisitions, joint ventures, or major sales channel partnerships–are not feasible for smaller installers. The business models of small installers indicate that their own soft cost breakdown strategies might not follow the trend of the DOE/SunShot soft cost breakdowns. Therefore, we cannot generalize that all installers should first work to reduce supply chain costs.
Lawrence Berkeley National Labs’ paper, Tracking the Sun VII: An Historical Summary of the Installed Price of Photovoltaics in the United States from 1998-2013,outlines the changing cost of solar since 1998 and concludes:
Achieving deep reductions in soft cost thus likely requires a broad mix of strategies, including: incentive policy designs that provide a stable and straightforward value proposition to foster efficiency and competition within the delivery infrastructure, targeted policies aimed at specific soft costs (for example, permitting and interconnection), and basic and applied research and development.
Aside from policy development, appliedresearch and development–including business model innovation and financial services products—will play a key role in the growth and optimization of tomorrow’s solar companies. Even solar installers that employ simpler techniques like A/B testing of new processes or installation methods and apply successful best practices from other industries to solar project deployment will reap rewards.
To better determine which areas of soft cost reduction to focus on, installers can adopt operational effectiveness tools and techniques. By using the critical path method (CPM) and learning how to identify wasteful steps in the project delivery process, installers can employ an individualized approach so they can focus on where their cost savings efforts will yield the greatest return on investment (ROI).
Step 1: Map Critical Path
The critical path is defined as the longest necessary path through a network of interdependency-related activities. CPM is a tool used to schedule project activities, including dependent tasks. It documents the actual process, not a theoretical process, and includes:
–All activities required to complete the project.
–Duration (days, hours) to complete each activity.
–Dependencies between activities.
–End-points such as major milestones.
Step 2: Understand Value-Added vs. Non-Value-Added Business Processes
A value-added process is an activity that a customer is willing to pay for that contributes to the end-product they expect. We can divide non-value-added processes into two categories: business requirements and pure waste. Business requirements are comprised of items such as company overhead (e.g., your fleet of vehicles, HR activities) or compliance-related activities related to project finance. Examples of pure waste, on the other hand, would be excessive coordination meetings, generating reports that are not read or acted on, multiple layers of approval, and any kind of rework. (To read more on understanding value-added vs. non-value-added processes, check this blog.)
Step 3: Use Value-Add/Non Value-Add to Identify Seven Forms of Waste
Originally identified by Toyota Chief Engineer Taiichi Ohno and codified into the Toyota production system (TPS) after World War 2, the seven forms of waste are used widely in Lean Six Sigma and other operational effectiveness programs to control costs, streamline process, and create customer value. The seven forms of waste, listed here, provide a framework to identify non-value-added steps.
Transportrefers to the unnecessary motion or movement of materials or information, including work-in-process, from one operation to another. This form of waste adds time to the process during which no one adds value.An example of this would be ordering from a vendor that cannot drop-ship directly to the customer site or to your warehouse. Since product must move through several channels, this adds time and the potential for loss or damage in the process that could further delay the project.
Inventorydescribes those items not directly required to fulfill current customer orders. Inventory includes raw materials, work-in-process, and finished goods. Inventory requires additional handling and space, and is often closely associated with waiting and overproduction.An example would be if one were to order more rails, mid-clamps, and wire than necessary for the amount of current projects and the run rate of equipment. This mode of thinking can have a compounding effect and could cause company capital to become tied up and unavailable for other uses. It also leads to crowded warehousing space, which could result in other instances of waste or to the leasing of even more warehouse space.
Motionincludes built-in extra steps taken by employees to accommodate inefficient process, rework, reprocessing, overproduction, or excess inventory. For example, this form of waste could lead to the development and automation of queues for plan set rework instead of reducing or eliminating the need for rework.
Waitingis any downstream inactivity that occurs because previous activities are not delivered on time. Idle downstream resources are often used in activities that either don’t add value or result in overproduction. An example of this would be when installers cannot perform installations because plan sets are not completed fast enough to pull permits and schedule jobs. These installers are then sent out on site evaluations or given warehouse “housekeeping” tasks.
Overproductionarises when an operation continues after it should have stopped. If a plan set is “overproduced,” it might include additional sheets, viewports, and data points above and beyond what the AHJ (authority having jurisdiction) or utility needs to approve the permit or the installer needs to build the project.
Overprocessingoccurs any time employees put more work into a project than is required to satisfy the customer. This form of waste also includes using components that are more precise, higher quality, or expensive than absolutely required. For example, a designer spends extra time on a project researching and specifying a nonstandard piece of equipment deemed necessary because of site conditions, despite the fact that the customer did not pay extra money for that equipment.
Defectsrefer to products or services not conforming to the company’s internal specification or the expectation of an internal spec or that of the final customer, thus leading to customer dissatisfaction.An example of this would be when an AHJ redlines and rejects a plan set because the design did not follow a local municipal code that was unknown to–or forgotten by–the designer. The designer cannot work on a new plan set and must research the issue and schedule rework of the old plan set. (To read more about the seven forms of waste with examples from residential solar, check this blog.)
The Bottom Line
Operational effectiveness methodologies like the seven forms of waste and project management techniques like CPM are two of dozens of approaches that business owners can employ to analyze their operations and discover which tasks and steps are contributing the most to their particular soft cost challenges. Because operations vary widely in terms of size and market pressures in different regions drive different economics and focus, installers should use the aforementioned NREL study as a guidepost but still make an effort to define and measure their own businesses in terms of where it might be most effective to initially pursue streamlining and cost savings strategies.
Business owners can use these methods to decide which soft cost areas are most impacting their business and which investments in reducing those targeted soft costs will result in the highest returns. They can then more easily identify external influences that may be inflicting defects, waiting, or requiring overprocessing, and develop exception management tools or processes to address those issues. The results of this analysis can then define standards that translate to key performance indicators (KPIs) that managers can use to measure employee productivity and company profitability.
Individualize Your Approach to Lowering Soft Costs. The delivery of residential solar is unstandardized and cannot be entirely streamlined, given the widely varying policy landscape. Each installer needs to prioritize their own set of top soft costs to focus on.
Plan for a Complex Policy Landscape. External policy-related pressures like differing AHJ or utility design requirements, different timetables for receiving a permit from an AHJ or utility, and nonuniform code enforcement can all create operations uncertainty.
Focus on Internal Process Control First.Installers should focus first on what process elements and costs they can control, develop exception management for processes that they cannot, and support local and national solar policy groups to help streamline soft costs related to government or regulatory interfaces like permitting and interconnection.